Regulation, Antitrust, Public Goods, and Public Choice

Discuss the rationale for government regulation of firms with market power. Is regulation in the consumer's interest or in the producer's interest and how might this control special interest groups?

Question 2

There is a tendency to turn problems of market failure over to the government. However, a representative democracy has failings of its own. Should we always expect government to perform better than the private sector in solving economic problems?

Solution Preview

Question 1: When we are dealing with monopolies, that is, companies with strong market power, consumers can find themselves in the position of price takers. Imagine a country in which healthcare is private and there is only one cancer hospital. It is an extreme example, but the severity of the situation, if you have cancer, could make the clinic charge you however much they want. Indeed, you could think that the pharmaceutical industry in the US, has a few of these problems.

More generally, we can use the case of the landline phone company in the US pre-cell phones and internet. A huge and costly amount of infrastructure is required to run the landline network and duplicating such infrastructure would have been wasteful. But, with no competition, the phone line can charge whatever it wants, which technically can lead to exhuberant profits. In this ...

Solution Summary

Answers the following questions in essay format:

Question 1

Discuss the rationale for government regulation of firms with market power. Is regulation in the consumer's interest or in the producer's interest and how might this control special interest groups?

Question 2

There is a tendency to turn problems of market failure over to the government. However, a representative democracy has failings of its own. Should we always expect government to perform better than the private sector in solving economic problems?